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Chapter 36, Part I. Scaling of Position. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Now let’s discuss a scaling out example.


    Chart #1 | EUR/USD 60-min Butterfly “Sell” trading
    [​IMG]

    Let’s suppose your trading plan assumes of trading this pattern. You do not know initially will it be 1.27 Butterfly or 1.618, so you’ve decided to enter from 1.27 area. According to trading rules, your stop should be at “invalidation point” that is 1.618 level + hourly harmonic number 20 pips, that couldn’t be passed just occasionally. Let’s suppose that your account assets are 10,000 USD and your money management rule is 1.0% in any trade. What lot should you enter from 1.3543 level and stop at 1.3590?

    Pipruit:
    Well, 1.5%*10,000 = $150. Then $150/(1.3590-1.3543) ~30,000USD or 0.3 standard lot.

    Commander in Pips: Very good. We’ve entered with 0.3 standard lot from 1.3543. What we do next is to skew probability in our favor. First, we have to turn our trade in breakeven way and lock in a minimum profit.



    Now we see, how price drops to 1.3496 - 50% support of whole butterfly move – from 1.3443 to 1.3550 high. You do not know what will happen next. You see that move down was nice and there are a lot of chances that it will continue, but you do not know for sure. At the same time, the market has passed 50 pips in your favor and shows some hint on retracement at 50% support.

    - You close 50% of your position. Profit 15,000*(1.3543-1.3496) = $70.5

    - You move the stop at second leg at breakeven – 1.3543.

    It always makes sense to take some chips off the table in such manner. Just look what we’ve just done – you will get some profit and your position now is riskless. You can just lie back and watch the movie…

    Trading is continuing…

    Later you see that market has hit 0.786 support. All later action will depend on trader’s experience. Newbie trader probably will close rest of position and get:
    - 15,000*(1.3543-1.3466) = $115.5 profit. Total profit is 115.5+70.5 = $186.

    Another way, if your broker allows you to do this – you may close 25 % or, say 0.08 lot and hold the other until the ultimate target at 1.3377.

    In fact this will not change the overall picture. Probably an experienced trader will get a bit more profit, while a newbie a bit less, but profit is profit. Pay attention to how probability was skewed by our action in our favor right after reaching of the nearest target at 1.3496. Here you shift your trade to 100% profitable one, since you already have earned 70 bucks. Second, you have turned the rest of it into a riskless position. That is scaling out application.

    Pipruit:
    Could I apply different stop management? For instance, could I not to take any profit at 50%, but just move to breakeven, since the market has passed harmonic number (40 pips) in my favor that should not been happened just occasionally?

    Commander in Pips: Well, you can do this. This will reduce your risk, but will not increase the probability to get profit. If market will return right back – you will not earn anything. And your job is to make profit. Trading is a marathon, and the winners are those who run long distances at the same speed, not the sprinters, who run fast initially but then stop. The “same speed” means gradual profit in every trade. As soon as you can take a reasonable part of it – do it. That we’ve done in our example on 50% support level. So we’ve accomplished our first goal – we will end this trade with profit anyway.
     
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